What's Next for Berkshire Hathaway: Barron's

Warren Buffett will be at center stage, as usual, during Berkshire Hathaway's annual meeting. But investors are increasingly looking for clues on what the company will be like when the longstanding CEO and chairman is no longer running it.

Berkshire could come under pressure to break itself up when the world's most acclaimed investor exits the stage. It might decide to pay a dividend rather than amass cash, as it does today while Buffett, 93, waits for investing opportunities. Buffett can expect to face questions on all these topics and more at the annual meeting on May 4 in Omaha, Neb.

Charlie Munger, Warren Buffett's longtime friend, business partner, and Berkshire vice chairman, who died last year at 99, won't be at his side. Munger's absence will only reinforce the obvious: Buffett's time atop the conglomerate he built over six decades could end during the next few years. Even Buffett acknowledges as much, writing in November that he felt "good" but was "playing in extra innings."

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For some 30,000 Berkshire shareholders expected to attend the meeting, the future will be the focus as Buffett fields questions for more than five hours in what could be his only public appearance of the year. Joining Buffett on the dais will be Vice Chairman Greg Abel, 61, likely tasked with the role of Buffett's successor as CEO, and Vice Chairman Ajit Jain, 72, who runs the company's insurance operations. Together they will answer questions small and large: Can the stock beat the S&P 500 index? Why have share repurchases declined since 2021? Can the company's new management prove anywhere as capable as Buffett? Should Berkshire break up?

But really, everyone will be focused on the same thing.

"Whether it's said out loud or not, succession is front and center on the minds of investors," says Cathy Seifert, a CFRA Research analyst.

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There is nothing like Berkshire. It has had an extraordinary run since Buffett took control of a struggling textile maker in 1965 and turned it into the world's largest conglomerate, with nearly 400,000 employees and U.S.-centric businesses that offer one of the best reads on the health of the economy. Some of its largest divisions are the Burlington Northern Santa Fe railroad; Berkshire Hathaway Energy, which operates a multistate electric utility business that is one of the largest producers of green power in the country; and the world's biggest property and casualty insurer, including Geico, the No. 3 auto insurer.

There are smaller units, such as NetJets, the leader in private jet travel; Clayton Homes, the top maker of manufactured housing; Benjamin Moore paints; Dairy Queen; and one of the largest real estate brokerage businesses in the country. Then there is a $360 billion equity portfolio led by Apple, which accounts for about 40% of Berkshire's holdings. There also is what Buffett calls a Fort Knox balance sheet, with nearly $170 billion in cash and equivalents.

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Berkshire isn't run like other conglomerates. It is unusually decentralized, with Buffett leaving key decisions at subsidiaries largely to the managers of the individual companies. He wrote in the Berkshire "Owner's Manual" in 2017 that "we delegate almost to the point of abdication." Berkshire has a tiny headquarters staff of 26 with no corporate counsel, investor relations, or public relations staff.

Berkshire's unusual strategy has worked. The company is expected to generate $40 billion of after-tax operating earnings this year and has a market capitalization of $880 billion, the seventh-largest in the stock market. The company's Class A stock has risen to over $600,000 a share from $20 (there have been no stock splits along the way) since Buffett took over in 1965, and holders who bought the now widely held Class B shares when they were created in 1996 have seen that stock rise 20-fold. It's one of the most widely held stocks by individuals, with some three million shareholders. Probably no other company elicits the passion and loyalty of its investor base. Big institutions have never appreciated the stock as much as individuals.

But will they continue to, once Buffett is no longer running the show? So central is Buffett to Berkshire's business that four or five people will take over the role that he maintained until 2018, when he delegated responsibility for Berkshire's non-insurance businesses to Abel and the insurance operations to Jain.

Abel is due to become CEO, which involves overseeing Berkshire's vast array of businesses and likely determining capital allocation, a critical role at the company that Buffett has performed so well for nearly 60 years. That means deciding whether to use earnings to repurchase stock, pay dividends, build cash, or make acquisitions. Jain is likely to remain head of the insurance business, while Buffett's older son, Howard, 69, a farmer and philanthropist, probably will become nonexecutive chairman.

Then there are Todd Combs, 53, and Ted Weschler, 61, who now run about 10% of Berkshire's equity investments and probably will run the entire portfolio. Berkshire doesn't say which stocks in the equity portfolio are run by Combs and Weschler, but Berkshire watchers think that many of the smaller holdings -- under $4 billion -- are theirs. These include Charter Communications, DaVita, Liberty Sirius XM, Amazon.com, Snowflake, Visa, and Mastercard. Buffett hasn't commented on their performance relative to the market since 2019 -- when he said they were slightly behind it since joining the company more than a decade ago. We estimate that both are probably lagging behind the market since their tenures began, given the underperformance of some of their rumored holdings in recent years.

Investment manager Bill Smead, who heads the Smead Value fund, would like to hear from Combs and Weschler. "Not introducing Todd and Ted is an unforgivable sin. If Warren dies tomorrow, they are the stockpickers, and they have never answered or been asked a question at the annual meeting."

Combs is a key member of the Berkshire bench and could be a backup to Abel as the Buffett successor or a potential successor to Abel as CEO. Combs has a good rapport with Buffett and has experience beyond investments as CEO of Geico for past four years and as a JPMorgan Chase board member. One candidate to succeed Jain as head of the insurance operations is Joe Brandon, who runs Alleghany, an insurer that Berkshire bought in 2022.

Buffett's three children, Howard, Susan, and Peter, will be in the mix after Buffett's death since they will oversee a charitable trust that will hold Buffett's now 15% economic stake in Berkshire, which has voting power of over 30% because it consists almost entirely of supervoting A shares. The Buffett stake will allow the children to wield considerable power, at least for several years, as the trust will liquidate over about a decade.

While Buffett acknowledges that he has slowed down in recent years, he looked sharp at the 2023 meeting. He talked for five hours, fortified with a Coke and peanut brittle from See's Candies, a Berkshire company. He showed command of all things Berkshire, the economy, and financial markets, both past and present. He is the last of a breed. Three years ago, there were four Berkshire directors age 90 or over -- all longtime friends of Buffett -- and they all are dead: Munger, David "Sandy" Gottesman, Tom Murphy, and Walter Scott. Smead says that without the outspoken Munger to prod him, Buffett may be more restrained at this year's meeting.

That won't stop investors from peppering him with questions. How long do you expect to run the company? What do Berkshire's slowing stock repurchases say about your views on the stock? Can Geico, which has slipped behind Progressive in auto insurance market share and technology, catch up? Would Berkshire walk away from its Western utilities and let them go bankrupt in the face of wildfire liabilities? Do you think it will make sense to pay a dividend once you're gone?

Buffett says he expects tough questions. "That's the way we like it," he wrote earlier this year.

"There will be more discussion of the possibility of a dividend at some point in time," says Ted Bridges, CEO of Bridges Trust, an Omaha investment manager. Buffett has conceded that buying public and private businesses is tough now, given higher valuations. And Berkshire handicaps itself by refusing to participate in corporate auctions. The dividend issue arouses passion among many individual Berkshire holders who don't want them, in part for tax reasons.

An important question, asked or not, is what will happen to Berkshire shares when Buffett steps down or dies. They may take a hit of perhaps 5% to 10%, as longtime holders cash out and investors worry that the Buffett magic will disappear. Buffett, though, has said he thinks the stock will go up on the day after his death as investors anticipate a value-enhancing corporate breakup.

There's a case to be made for a breakup. It's the world's biggest conglomerate at a time when conglomerates have fallen out of favor, with the likes of General Electric and United Technologies having broken up in recent years. For all of Buffett's investment acumen and business smarts, Berkshire stock is about even with the S&P 500 as measured by total return over the past 10 years and 20 years, Bloomberg calculations show. The stock has returned 12.4% annually over the past 10 years, against 12.5% for the S&P 500. Buffett has said that Berkshire needs to top it over time or investors should consider looking elsewhere.

All the massive outperformance came in Buffett's first 40 years at the helm, when the company was smaller and Buffett had a particularly hot investment hand, scooping up big stakes in companies like Coca-Cola and American Express at cheap prices. Size, too, is an impediment to outsize returns.

Buffett hasn't had a lot of new winners in the past decade. The company's largest acquisition -- the 2016 purchase of Precision Castparts for $33 billion -- has been a bust. Buffett has had some misses in the stock market, selling a group of financial stocks including Wells Fargo and JPMorgan Chase in 2020 and 2021 at about half their current prices. Of course, Apple has been a huge win with Berkshire's stake, now worth over $150 billion, compared with a cost of around $30 billion. But the iPhone giant is having a rough 2024, and its stock is down more than10% year to date.

Berkshire shares look like a good bet to match or beat the S&P 500 even after Buffett leaves the scene. The stock now looks appealing, valued at 1.5 times its projected March 31 book value of nearly $400,000 per Class A share and for 22 times estimated 2024 earnings. (Berkshire is due to report its first-quarter results on May 4.) Berkshire is slightly expensive relative to its five-year average of 1.4 times book value. The stock is ahead of the market this year and over the past five years.

Book value is an old-fashioned valuation measure but is still relevant for Berkshire because of its large insurance operations -- insurers still get valued on book -- and because it has been a historical yardstick for the company since Buffett took over.

Buffett chooses to focus on intrinsic value but doesn't disclose his estimate of that figure. Buffett has said that book value is a greatly understated proxy for intrinsic value, although share repurchases at current prices do reduce book value, somewhat undercutting the use of that measurement.

Post Buffett, Berkshire's stock is likely to be supported by steady growth in its earnings and shareholder equity over time. The company appears capable of high-single-digit annual growth in book value based on $40 billion of operating income after taxes and gains in the $360 billion equity portfolio. If the stock keeps pace with the growth in book value, it could show similar share price growth.

A dividend is a good bet within a few years of Buffett's death. Why? It will help his successor disburse some of the annual operating earnings. Another reason is that investors won't be so tolerant of Berkshire holding so much cash -- a record $168 billion at year-end 2023 -- without Buffett at the helm.

Christopher Bloomstran, chief investment strategist at Semper Augustus Investment Group, wrote earlier this year that Berkshire stock could generate a 10% to 11% annualized return over the next 10 years, with annual share buybacks in the 2% to 3% range -- above the recent rate of 1% to 1.5%. He pegged intrinsic value at around $720,000 a share.

UBS analyst Brian Meredith is one of the few Berkshire bulls among Wall Street analysts. He recently lifted his price target to about $722,000 per Class A share from $715,000. He sees improvement at both Geico and Burlington Northern. Berkshire is one of the most defensive big stocks in the market, given its balance sheet and earnings power. A market selloff could offer opportunities for Buffett.

Buffett is firmly against a breakup. He argues the conglomerate structure has numerous attributes, including tax benefits from the ability to quickly make use of any big catastrophe losses at Berkshire's insurance companies. Buffett has expressed confidence in the company's future, writing last year that "Berkshire has been built to last." And the company's Buffett-friendly 14-member board -- including two of Buffett's kids -- is well aware of his views.

"Berkshire has been run with enormous transparency, integrity, a long-term orientation, and a culture of stewardship. It is run by the greatest investor in history. That's the present," Chris Davis, an investment manager and Berkshire board member, told Barron's last year . "As for the future, every activist and investment banker will argue that in a world without Warren and Charlie, Berkshire's unorthodox structure shouldn't persist. I think it's worth defending."

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Whatever the questions, Berkshire shareholders will savor the annual meeting, knowing there may not be many more with Buffett at the helm. As for the stock, many may heed the advice of Munger, who said that "they should keep the faith" rather than sell after he and Buffett are gone.

Write to Andrew Bary at andrew.bary@barrons.com

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